State Farm Mutual Automobile Insurance v. Freyer
372 Mont. 191
| Mont. | 2013Background
- In a 2003 rollover, Vail (driver), Heath (decedent), and infant Alicia were passengers; Heath died and Alicia suffered minor injuries. State Farm insured the vehicle with $50,000 Each Person / $100,000 Each Accident limits and offered $50,000 to Heath’s estate.
- Frank (Heath’s father) demanded $50,000 for Alicia’s derivative wrongful-death claims; State Farm declined, defending its position that the policy’s “Each Person” limit applied to all claims arising from one person’s bodily injury.
- State Farm litigated the coverage question (and a federal court had reached a similar interpretation in Bowen), defended Vail under reservation, and later filed a declaratory-judgment action about policy limits; the parties ultimately entered a $2.6 million stipulated judgment against Vail with a covenant not to execute.
- The Montana Supreme Court in Freyer I (2010) reversed and held Alicia’s derivative claims were payable under her own $50,000 Each Person limit; State Farm then paid additional amounts and stacked UIM benefits, totaling $400,000 to the Freyers.
- Frank and Vail sued State Farm for breach of contract, bad faith / breach of implied covenant, and UTPA violations based on State Farm’s prior denial; the District Court granted summary judgment to State Farm, finding it had a “reasonable basis in law” to contest coverage.
- On appeal the Montana Supreme Court: (1) reversed as to breach-of-contract (insurer’s reasonableness is not a defense to breach), (2) affirmed summary judgment for State Farm on bad-faith and covenant claims (reasonableness in law is a defense), (3) affirmed dismissal of UTPA claims (statutory reasonable-basis defense applies), and (4) remanded to determine contract damages (not binding the insurer to the stipulated judgment).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1. Did insurer’s “reasonable basis in law” excuse failure to indemnify? | Freyers: breach is breach; insurer’s subjective/legal reasonableness does not excuse failure to pay Alicia’s derivative claims. | State Farm: had a reasonable legal basis to deny additional payment; it later paid when courts required. | Court: Reverse District Court — reasonableness in law is not a defense to breach of contract; insurer breached duty to indemnify and must face damages inquiry. |
| 2. Are bad-faith / breach of covenant claims defeated by insurer’s reasonable legal position? | Freyers: insurer acted in bad faith by refusing to settle and offering only $5,000, placing insured at risk. | State Farm: had a reasonable basis in law to contest coverage; Montana law bars bad-faith liability if reasonable basis exists. | Court: Affirm — summary judgment for State Farm on bad-faith and covenant claims because its coverage position was reasonable in law. |
| 3. Do UTPA misrepresentation claims survive given the statutory "reasonable basis" defense? | Frank: §33-18-201(1) misrepresentation claim stands; reasonable-basis defense shouldn't apply. | State Farm: §33-18-242(5) provides a statutory defense when insurer had a reasonable basis in law or fact. | Court: Affirm — statutory reasonable-basis defense applies; State Farm wins on UTPA claims. |
| 4. Did State Farm waive statute-of-limitations defenses by pleading? | Frank/Vail: amendments did not create new claims; State Farm waived limitations by not asserting earlier. | State Farm: amended counterclaims supersede earlier ones so limitations defenses are timely. | Court: Did not decide — unnecessary because State Farm prevailed on claims where it raised the defense; issue reserved. |
Key Cases Cited
- State Farm Mut. Auto. Ins. Co. v. Freyer, 357 Mont. 329 (Mont. 2010) (Freyer I) (Montana Supreme Court construed same policy language to allow payment of derivative claims under injured claimant’s own Each Person limit)
- Redies v. Attys. Liab. Prot. Soc'y, 335 Mont. 233 (Mont. 2007) (clarifies that whether insurer had a reasonable basis in law is a question of law for the court when it depends entirely on legal precedent)
- Bain v. Gleason, 223 Mont. 442 (Mont. 1986) (Each Person limit construed to cover all damages arising out of bodily injury to one person)
- Treichel v. State Farm Mut. Auto. Ins. Co., 280 Mont. 443 (Mont. 1997) (distinguishes emotional-distress claims of on‑scene witnesses as independent bodily-injury claims)
- Old Republic Ins. Co. v. Ross, 180 P.3d 427 (Colo. 2008) (refuses to enforce pretrial stipulated judgment against insurer that defended insured and was not found in bad faith)
- Hamilton v. Maryland Cas. Co., 41 P.3d 128 (Cal. 2002) (stated rule that stipulated judgment coupled with covenant not to execute is not enforceable against insurer that defended the insured absent bad faith)
- Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982) (insured’s stipulated judgment enforceable against insurer only up to policy limits when insurer defended but coverage was contested)